Making Markets Work: Rail Franchising

According to some polls, 60% of people think that the rail network should be nationalised, whilst only 25% believe it should remain in private hands. With the chaos affecting the Thameslink and Great Northern networks, annual above-inflation price-rises and a number of well-publicised failures in franchising such as the 2012 West Coast Mainline debacle, it’s easy to see the appeal. But at the same time, it’s not that simple.

The number of rail journeys being made has more than doubled since privatisation in the late ’90s. Regardless of other factors, that’s an impressive increase in performance. And, recent circumstances excepted, the trains do generally run on time these days, whereas British Rail had been a byword for inefficiency and delay. Yet excessively high salaries of rail executives rightly offend, and a combination of government subsidies to Network Rail and rail franchisee’s payments to the Exchequer can make it difficult to tell how much the taxpayer is genuinely spending or receiving. Nationalisation may offer the siren-song of simplicity, but it is hard to tell whether or not it would genuinely make our rail services better or cheaper.

Rather than renationalisation, a better solution would be to pledge to allow a state-owned rail company to tender for other franchises on a level playing field with other companies. The state-owned company would have the advantage that it wouldn’t need to make a profit (and any profits made would simply be returned to the Treasury); the private companies might have the often-cited advantages of greater efficiency: instead of needing to speculate, the government could simply award each franchise to whichever offered the better deal. There is even a precedent: a number of the companies currently running our rail franchises are state-owned, such as the German state-owned Deutschebahn, which controls Arriva.

This is not a new idea, but with the recent timetabling fiasco and with the East Coast Mainline recently returned to state hands, there has never been a better time to do it. Last time the East Coast Mainline was in public ownership it had high levels of profitability and satisfaction, paying over £1bn to government over the course of the franchise, making it well-placed to bid for other franchises as the tenders become available. And of course, if the public company failed to deliver, it could be stripped of a franchise, just as a private company could.

The beauty of this system is that it allows future decisions on the ownership of our railways to be taken on the basis of evidence, not ideology. A pledge allow a state-owned company to tender would defang the seductive nature of Corbyn’s promises on nationalisation: the public would know that, if the state-owned company genuinely offered better value, it would win the franchises.

The system preserves the best elements of both the private and the public sector: by forcing it to compete for contracts, the state-owned company will be kept efficient whilst, if it wins, the taxpayer will benefit from retained profits. Transition between public and private occurs in a managed, sustainable fashion and, either way, passengers and the taxpayer benefit from the best possible value for money.

Marking Markets Work is a series exploring how the free market can operate more effectively to deliver benefits to ordinary working people. It affirms that the free market has been the best and most successful mechanism for generating prosperity and lifting people out of poverty, but recognises that in recent years a number of departures from the theoretical ideals of a competitive market have resulted in some discrepancies between headline economic figures and the welfare and wellbeing of ordinary citizens. The series considers how small interventions could address these distortions to improve both economic and social returns from the economy.